Financial Statements

Financial statements are an historical record of your business’ performance over a past period – usually one year – for the benefit of external users such as shareholders, employees, suppliers, bankers and authorities.

Profit and loss account

  • A profit and loss account is a summary of business transactions for a given period – normally 12 months. By deducting total expenditure from total income, it shows on the ‘bottom line’ whether your business made a profit or loss at the end of that period.
  • A profit and loss account is produced primarily for business purposes – to show owners, shareholders or potential investors how the business is performing. But most of the information is also used by HM Revenue & Customs to work out your tax bill.

Balance sheet

Your balance sheet is a financial statement at a given point in time. It provides a snapshot summary of what your business owns or is owed – assets – and what it owes – liabilities – at a particular date.

The balance sheet therefore shows how your business is being funded and how you are using these funds.

There are three ways you may use your balance sheet:

  • for reporting purposes as part of a limited company’s annual accounts
  • to help you and other interested parties such as investors, creditors or shareholders to assess the worth of your business at a given moment
  • as a tool to help you analyse and improve the management of your business

Cashflow statement

Cash is the oxygen that enables a business to survive and prosper and is the primary indicator of business health. While a business can survive for a short time without sales or profits, without cash it will die. For this reason the inflow and outflow of cash need careful monitoring and management.

Trial balance

Listing of the account balances from the cash book and other general ledgers, prepared at the end of the accounting period. Total debits must equal total credits; otherwise, an error has been made. Even though the trial balance furnishes arithmetical proof that debits equal credits, it does not detect all errors. For example, a posting to the wrong account may have occurred. The trial balance is a work sheet and not a formal financial statement.

Cash book

The cash book is the final record of all the money that comes into and goes out of your business.

To complete your cash book, you’ll need to collect and hold on to:

  • cheque book stubs
  • cancelled cheques
  • bank paying-in books
  • bank statements
  • copies of your own invoices
  • receipts and delivery notes
  • your suppliers’ invoices
  • receipts for all cash purchases, till roles, etc
  • remittance advices from customers
  • copies of payments made or received using online banking systems

Monthly reconciliations

Bank reconciliation, agreeing the cash book back to the bank statements.

VAT reconciliation, controlling the VAT declared to HM Revenue & Customs and agreeing the payment/receipt back to the VAT return.

Net wages reconciliation, agreeing the payments made to staff to payroll records.

PAYE/NI reconciliation, agreeing the tax and National Insurance due to HM Revenue & Customs as calculated from payroll records to the payments made.

Aged debtors reports and maintenance of sales ledger

A sales ledger records:

  • the sales your company has made
  • the amount of money received for your goods or services
  • money owed at the end of each month

It’s a useful business-planning tool, enabling you to monitor and chase slow payers and see which customers are most profitable. Every time you invoice a customer, it should be recorded in the sales ledger. By recording the amounts paid by customers in the sales ledger you will also be able to identify the money owed to your business, this is an aged debtor analysis. Any customers that have exceeded your payment terms can then be chased. All those owing you money should remain on the ledger until their debts have been cleared.

Aged creditors reports and maintenance of purchase ledger

A purchase ledger records all purchases made by your business.

It helps you to monitor:

  • your business’ outgoings
  • how much money you owe at any one time

In addition, it gives you a record of your most regular suppliers and how much you have spent with each.

By recording in the purchase ledger payments for purchases you have made, you will be able to identify the amount unpaid, this is an aged creditor analysis. This identifies how much you owe at any given time. Any creditors should remain on the purchase ledger system until payment is made.